DekelOil (BUY) A return to form
DKL LN (8.9p, TP 24p), Market Cap: £27m
Our view: A stronger Q4 shows DekelOil back on track in our view following earlier one-off mechanical issues. The ability to secure premium prices is also apparent. The company is now set to complete the planned capacity increase at the Ayenouan mill ahead of the peak harvesting season starting in February. The production numbers and underlying return to form give us confidence that this will drive growth at least in line with our forecasts and we reiterate our BUY recommendation and target price of 24p.
· Q4 rebound in production DekelOil has released its full year production update showing a healthy rebound in Q4 CPO production and sales delivering the companys highest Q4 CPO , reversing the weaker data seen in Q3 and delivering overall production broadly in line with 2016 at 38,736 tonnes. Sales of CPO were 38,378 t, slightly ahead of our forecast 38,085t. Pricing was also stronger with the company averaging 680/t in the full year ahead of our 665/t forecast and we estimate that this represents a premium to the Rotterdam CPO price of 7%. Palm kernel and palm cake production and sales were slightly lower than last year but again prices were stronger than expected with palm kernel oil showing particular gains.
· Return to form ahead of capacity increase The results reflect a return to normal operations following one off mechanical issues earlier in the year. The CPO extraction rate has been a little lower than in previous years at 22.6% compared to 22.9% in 2016. While this is good for the Cote dIvoire, a lower oil content is thought to be due to the processing of slightly younger fruit following heavy planting over the last 5-7 years. The extraction rate should be expected to rise again with plant maturity. The company is now set to increase capacity at the Ayenouan mill to 75 tonnes per hour from 60 and the new capacity will be in place ahead of the peak harvesting season starting in February.
· Valuation reflects cashflows We value DekelOil on a DCF basis with a cost of equity of 15% and cost of debt of 10%. This gives us a target price of 24p. The principal risks to our valuation are volatility in the CPO price and production volumes.
"DekelOil Executive Director Lincoln Moore said, "Thanks to a record Q4 performance, our 2017 CPO production, at 38,736 tonnes, closely matches last year's total, a highly creditable outcome particularly when the unplanned stoppages at the Mill during May and June are taken into account. The combination of stable production and higher CPO pricing will translate into record full year revenues and profits.
"Prior to 2017, CPO production at Ayenouan had grown for three consecutive years. We expect 2018 will see a resumption in annual CPO production growth. Our confidence is based not only on DekelOil's growing standing among local smallholders as an established and reliable buyer of fruit, but also the imminent completion of the 25% increase in the Mill's capacity to 75 tonnes per hour from 60 tonnes per hour. Importantly, this will be in place in time for the commencement of the peak harvest season, which typically runs from February until June in Côte d'Ivoire."
I don't know the answer but I think it is the loss of confidence following the two issues that you mention. I think that we will be kicking ourselves early next year if we don't top up at these prices!
Seems to me that this is a well run company with a good management team. However, as with almost all commodity-based companies, it has little control over price and sometimes production (weather factors etc.). The sell off seems over done, unless it is a comment on the base commodity itself and its market, but brokers need to be more realistic in their future share price estimates if they wish to retain credibility - the estimates have been stupidly high for too long. Nevertheless , all things equal and assuming no commodities market collapse, I see this recent drop as a good buying opportunity.
Back from hols, and surprised as everyone was about the Q3 update and the subsequent follow-up. Management have been extremely naïve in not flagging the lower Q3 production in the interim results, and naïve/negligent in not having satisfactory revenue recognition controls in place.
Nevertheless, I do believe the share price has over-reacted, as often happens in these circumstances. Management HAVE proven that they can build from scratch and in good time a highly profitable and successful operation which can be replicated elsewhere. They now have to show that they can similarly manage successfully expectations of a PLC and its shareholders.
Beaufort Securities' latest update post the Q3 production update concludes as follows - hopefully management have guided them prudently. If so, then the current share price is extremely cheap:
"Beaufort considers DekelOil is capable of producing as much as £2.0m free cashflow during 2017E, followed by around £5m the year after. Importantly this demonstrates managements willingness to move its ambitious planning forward without directly exposing shareholders to a higher risk profile. Based on modestly revised 2017E and 2018E revenues estimates of 31.1m and 35.8m, delivering fully-diluted earnings 1.60p and 2.20p respectively, the shares now trade on forward multiples of just 6.5x and 4.7x respectively while offering yields of 1.7% and 1.9%. Beaufort retains its Buy recommendation on DekelOil, while repeating its price target of 23p/share."
Appears to be one of those 'lots of good news but zero LT price movement' shares. I have no idea where those guys are getting their 23-30 price estimate. Maybe they are talking in a different currency.
. . . I stumbled across this board, thinking it was a different oil company (Delekoil) which may not even be listed on the LSE.
So palm oil production is what these fellows do. Well investment should be fun I suppose, or at least educational
(Although we would very much like to make some money too)
Supporting commercial agriculture in West Africa cannot be bad, and they seem to know what they are doing, making real hard cash in H1.
Niggling doubts might be around high-ish borrowings, being dependent on commodity prices, a management team maybe just a little too impatient to scale up, and of course investing in Africa can be a bit tricky at the best of times.
Still worth a little punt and see how it goes
When the Asian countries get stuck into these commodities they tend to be very efficient producers so I hope we can match them here
Beaufort Securities today retain their 23p target.
They forecast 1.77p EPS this year and 2.42p EPS next year - those are P/E's of 6.9 falling to just 5.1.....
"Our View: Impressive stuff! The first half of 2017 saw DekelOil acquire 100% of Ayenouan, further strengthen its balance sheet, pay out a maiden dividend and report record sales and profits. There is clear momentum behind the business, both at the operational and corporate level and Beaufort expects this to be maintained going forward. Having proven its business plan, management is now keen to roll-out its vertically integrated model, which includes a state of the art nursery, mill, and company-owned estates, elsewhere in the region.
At Guitry, operations have already formally commenced and the Board remains in discussions to acquire an interest in Norpalm Ghana Limited ('NGL'), a vertically integrated palm oil producer in Western Ghana which has approximately 4,000 hectares of mature palm plantations under ownership and produces some 15,000 tonnes of CPO a year from a 30t/hr mill. In addition to the revenue it generates from selling this produce into the domestic Ghanaian market, NGL also operates a palm kernel oil press which produces approximately 2,000 tn of PKO. There can be no guarantee current discussions will result in DekelOil acquiring NGL, but they nevertheless demonstrate management's confidence in its ability to replicate success already achieved.
Having proven both the operating model and ability to implement it, shareholders should be reasonably confident of further progress as DekelOil seeks to transform itself into a leading West African palm oil producer. Indeed, Beaufort considers DekelOil is capable of producing as much as £2.7m free cashflow during 2017E, followed by around £6m the year after. Importantly also, yesterday's update demonstrates management willingness to move its ambitious planning forward without exposing shareholders to a higher risk profile.
Based on 2017E and 2018E revenues estimates of 33.1m and 36.8m, delivering fully-diluted earnings 1.77p and 2.42p respectively, the shares trade on forward multiples of just 6.9x and 5.1x respectively while offering yields of 1.6% and 1.8%.
Beaufort retains its Buy recommendation on DekelOil, while repeating its price target of 23p/share."
Sara789456 has posted this incomplete update from Optiva Securities elsewhere - hope she doesn't mind me copying it.
Optiva have adjusted their target price to 30p (from 34p), and see 36.3p with Guitry included - DKL are now on a ridiculous forward P/E of just 4 at 12p:
"We believe DekelOil still offers investors a compelling and a deep value investment opportunity; DekelOil trade on a forward FY18 P/E of 4x on double-digit EPS growth. We have adjusted our price to 30p from 34p, and if the Guitry project is successfully implemented, our target price increases to 36.3p.
We believe DekelOil still offers investors a compelling and a deep value investment opportunity; DekelOil trade on a forward FY18 P/E of 4x on double-digit EPS growth. We have adjusted our price to 30p from 34p, and if the Guitry project is successfully implemented, our target price increases to 36.3p.
H1 2017 Summary:
� Total CPO Production 26,957 in H1 2017
� 22.6% increase in revenues to �19.6m (H1 2016: �16.0m)
� 19.4% increase in EBITDA to �3.7m vs (H1 2016: �3.1m)
� 33.3% increase in Net Profits to �3.7m (H1 2016: �1.8m)
� 0.17p dividend to be paid on 4 September 2017
In our view, the management continue to deliver robust revenue, profitability and cash growth despite of the one-off mechanical issues. The issue resulted in a loss of production of about 3.5/4kt of CPO. This was due to blockage in production flow in the kernel processing pipe and equipment failure within the de-oiling tank. These issues have been rectified, but we are taking a conservative view in H2 and FY18, which is reflected in our adjusted forecast shown below.
The real excitement in the H1 interims comes from the management decision to formally expand into Guitry; a 100% owned second-project based on Cote d�Iviore and interest in Norpalm Ghana Limited, a vertically integrated palm oil producer in Western Ghana.
Guitry is situated 160km north west of Abidijan, and 240km west from the current project in Ayenouan.
DekelOil has the right to develop;
� 24,000Ha brownfield land
� Establish a plant nursery facility with the capacity to product 1m palm plants per annum
� 30 tonnes per hour Mill
The management has already ordered nursery equipment, completed the Social & Environmental Impact Assessment and water survey. We anticipate development costs of �200-250k in the next 12 months, which will be funded through the Ayenouan project cash flows.
The current Ayenounan 60t/h Mill had a capital cost of �15.5m, of which 92% was funded by debt. We will assume the new 30t/h Mill will have a capital cost of approximately �10m and will begin operations in 2020. We also assume that DekelOil will secure 90% debt funding and minority equity partner for 49%, a similar strategy to how they commenced the Ayenounan project in 2013/14. At a CPO price of �500/t we get a conservative project valuation of &#...."
· Record H1 financial performance due to stronger pricing and the increase in CPO storage capacity from 5,000 to 8,000 tonnes which enabled the Company to sell CPO at a premium to international prices
· 22.6% increase in revenues to 19.6 million (H1 2016: 16.0 m) - includes sale of Crude Palm Oil ('CPO'), Palm Kernel Oil ('PKO'), Palm Kernel Cake ('PKC') and Nursery Plants
· 19.4% increase in EBITDA to 3.7 million (H1 2016: 3.1 m)
· 33.3% increase in net profit after tax to 2.4million (H1 2016: 1.8m)
· 26,947 tonnes of CPO produced in H1 2017 (H1 2016: 28,550 tonnes) - record Q1 like-for-like production was followed by lower Q2 CPO volumes due to now rectified mechanical issues....
Maiden final dividend
· Progressive dividend policy adopted and final dividend of 0.17p per ordinary share declared and paid on 4 September 2017....
DekelOil Executive Director Lincoln Moore said, "The record first half financial performance, specifically in terms of revenues, EBITDA and net profit, demonstrates how cash generative our 100%-owned palm oil project at Ayenouan is becoming. Not only does it generate funds for additional investment into the project to increase profitability further, such as the new 3,000 tonne storage tank, but also sufficient cash to pay down debt and to fund a progressive dividend policy.
"Ayenouan proves our strategy to work closely with local smallholders works for all parties and we are keen to roll-out our vertically integrated model, which includes a state of the art nursery, mill, and company-owned estates, elsewhere in the region. We are already making progress: as announced post period end, operations at Guitry, our second 100%-owned project in Côte d'Ivoire have formally commenced; and we remain in discussions to acquire an interest in Norpalm Ghana Limited, a vertically integrated palm oil producer in Western Ghana which produces approximately 15,000 tonnes of CPO a year from a 30t/hr mill. Becoming a multi-project palm oil producer is key to delivering on our goal to transform DekelOil into a leading palm oil company in West Africa and I look forward to providing further updates on our progress in due course."
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.